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Why I Just Bought Starbucks Stock

After a recent pullback in shares of the coffee chain, the stock is affordably priced for the long-term growth it represents.

I've had my eye on Starbucks (NASDAQ:SBUX) shares for a while, and when the stock approached a 52-week low earlier this month, I took advantage by picking up some shares for my personal account.

There are a number of reasons why I think Starbucks is a good bet for the long run, and with its combination of dividends and growth, it's an ideal stock for almost any investor. Let's take a look at a few of the factors that make the coffee giant such a solid investment.

1. Brand advantage

In Interbrand's annual report, Starbucks was the sixth fastest-growing brand in the world, increasing its brand value by 20% in the last year to $7.4 billion or No. 64 on the list. But Starbucks' brand strength is self-evident beyond any third-party survey.

In a giant industry -- the global retail coffee market brings in more than $100 billion a year -- Starbucks is essentially peerless as the worldwide leader. Dunkin Donuts' parent Dunkin Brands' (NASDAQ:DNKN), arguably Starbucks' closest rival, has a market cap of just $4.7 billion compared to Starbucks at $78 billion, even though Dunkin' Donuts has around half as many locations (about 11,000) as Starbucks does worldwide.

Starbucks' brand strength has allowed it to expand into consumer packaged goods, like K-cups, packaged coffee, and ready-to-drink beverages like bottled Frappuccinos, and it's fueled the company's international growth and its ability to charge high prices and deliver fat margins for investors. Its profit margin now sits above 13%, and its operating margin is better than 19%.

2. Growth opportunities

While jokes about Starbucks' ubiquity in the U.S. once abounded, the company has continued to find new ways to grow both at home and internationally. In the U.S., it's leveraged its store base and brand through innovations like mobile order and pay, allowing the company to serve its customers faster and taking advantage of the millions of digital relationships it's built with them. And it's also improving its food offering and is expanding its range of store experiences with express stores designed for the on-the-go customer and with its Reserve Roasteries, which have been called a Willy Wonka-like vision of the "theater of coffee," as CEO Howard Schultz likes to say. It's also bringing its Starbucks Evenings program, which features wine and beer, to more locations

Channel development, as Starbucks refers to its consumer packaged goods, also present opportunities for Starbucks to lift its sales without opening more stores, both at home and abroad.

What may hold even more promise is its international segment. Starbucks has said it plans to open 500 stores a year for the next five years in the China, where the coffee chain has been particularly successful thanks to China's booming middle class. At the end of 2014, the company detailed plans to nearly double revenue over the next five years to $30 billion, and it seems well on its way to doing so as it's already at $20.5 billion.

3. Dividend growth

Not only is Starbucks delivering strong earnings growth but the company is also committed to returning its profits to investors. Since it introduced a dividend in 2010, it's raised it by 23% or more each year, and another dividend increase is due when it reports fourth-quarter earnings on Nov. 3. Starbucks is likely to raise its quarterly payout by at least 20% to $0.24, giving it a yield close to 2%. It also has a modest payout ratio of just 41%, meaning it could afford to increase its dividend even if earnings growth slows down. However, with its brand strength and growth opportunities, Starbucks' dividend is likely to double within the next five years, and it's easy to see the stock becoming a Dividend Aristocrat down the road, or a company that raises its dividend every year for 25 years in a row.

With the so-called restaurant recession weighing on the U.S., Starbucks' growth could be muted over the coming quarters, but over the long term, the company has the competitive advantage and growth opportunities to continue to outperform the market.

Author

Fool since 2011. I write about consumer goods, the big picture, and whatever else piques my interest. Follow me on Twitter to see my latest articles, and for commentary on hot topics in retail and the broad market.
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